NY futures continued to move higher this week, as March gained 150 points to close at 74.19 cents.

It was a rollercoaster ride, as the market moved wildly within a 247-point range between 72.53 and 75.00 cents this week, but nevertheless ended up at its second highest close since early August. Only Monday’s settlement of 74.63 cents was slightly higher.

The story hasn’t really changed at all this week, as US merchants continue to offload sizeable amounts of basis-longs onto mills, which are willing to increase their unfixed holdings due to attractive basis levels. This kind of action is building continued support under the market for the coming months and ultimately defeats the purpose of buying ‘on-call’. A better approach for mills would be to buy their cotton at a fixed price and then buy a bearish options strategy.

US export sales for the week of January 13-19 amounted to a stellar 473,900 running bales of Upland and Pima cotton. There were 20 markets participating in the buying, while 24 destinations received shipments of 241,400 running bales. For the season we now have commitments of 10.0 million statistical bales, of which 4.9 million bales have so far been exported.

As already stated, most of these sales were made ‘on-call’, as the latest CFTC report of this afternoon confirms. As of last Friday unfixed on-call sales climbed to 11.83 million bales, of which 3.55 are on March, 2.91 on May and 2.95 on July. Of particular importance is the still very large March number, as mills have not made much progress last week and keep chasing after the market, which in turn translates into higher prices.

With the fixation deadline only about three weeks away, mills are starting to feel the pinch to get something done. Many are waiting for the index roll period in early February to provide the necessary liquidity to get some of these shorts squared away.

However, as we have mentioned before, since the trade is a net buyer of futures, while speculators may decide to roll most of their position forward, we might see some upward pressure during the index roll. Again, the futures market is a zero sum game, and if one side wants, or rather needs to buy, while the other side sits on its long, prices will be forced higher. March open interest of 154,000 contracts is still at a record level for this date and this should make for an interesting and volatile liquidation period.

From a speculator’s perspective the market is performing well, both technically as well as in a macroeconomic framework. Consumer confidence is up in the US and Europe, and the deflationary mindset is giving way to one of pro-growth and higher inflation.

While the US dollar is being talked up by many analysts, the chart of the US Dollar Index tells a different story, with a head-and-shoulders formation warning of a potential sell-off in the not to distant future. If that were to happen, it would lend additional support to commodities.

So where do we go from here? Another week has passed and mills have not made much headway with their March fixations. This means that there is less time left to get more than 3 million bales fixed, or rolled, which makes this market dangerous.

Some traders have labeled today’s performance as disappointing, considering that we woke up to the best export sales report in about 3 years. However, we need to remember that apart from a psychological boost these export sales don’t translate into the buying of futures, since almost all of them were made ‘on-call’. Only once the mill finally fixes the sale will short futures get bought back. Since mills are still hesitant to pull the trigger, the market is lacking buying power at this point. In other words, the trade isn’t covering shorts just yet and speculators are already quite long, making it difficult for them to add to their position.

But time is starting to run out on March fixations and the risk is that they all have to act within a limited space of time, which could lead to upward pressure, especially if speculators continued to sit tight.

Although low volatility readings of 19-20% for current crop futures tell us that the market doesn’t expect much to happen, some traders out there have been buying ‘lottery tickets’ in the form of July call options with 120 cents and 150 cents strikes. While we are not ready to call for an event like in 2008 or 2011, we wouldn’t be surprised if the market were to rally into the high 70s or even low 80s on a fixation squeeze, followed by a drop back towards 70 cents.

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